China-Canada bank merger hint at Nexen deal

BillMann

VANCOUVER, B.C. (MarketWatch) — Canada is still waiting to see what happens with a stalled bank deal with China as the Harper government gets ready to revamp its own official policy on foreign takeovers.

The Bank of Nova Scotia
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takeover of the Bank of Guangzhou is a C$720 million deal, much smaller than a bigger oil-company acquisition looming in Canada. But the big Canadian bank has been waiting since last Christmas for the Chinese government to approve the deal.

The Bank of Guanghzou-BNS deal is important because it is an example of the reciprocity Stephen Harper’s government insists it will require when it soon updates the law regarding takeovers of Canadian companies by foreign operations. A much bigger deal, Cnooc’s
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C$15.1 billion takeover of Calgary energy company Nexen
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is looming, and the two deals could be interdependent.

That stalled bank deal was discussed this past week on the last day of the APEC summit in talks between Canadian Prime Minister Stephen Harper and Chinese President Hu Jintao, as well as the Cnooc takeover of the Canadian oil company.

The clock in Canada is now ticking on that latter deal, which is officially under scrutiny in Ottawa. Nexen is considered a litmus test for Canada’s soon-to-be updated foreign-investment law, The Investment Canada Act, which, Harper has just announced, will get some much-needed clarification. Harper says he’ll outline the new investment policies this fall when it rules on the big Nexen deal. The bank deal will be closely watched during this review process.

Overdue

A new road map for Canada takeover deals is way overdue.

The Investment Canada Act stipulates that foreign takeover deals of Canadian companies must provide a “net benefit” to Canada. It’s a vague standard wide open to political pressure — like the arm-twisting that killed the 2010 deal between BHP-Billiton
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Potash Corp.
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Not surprisingly, the act’s vague language has made potential investors nervous.

As Canada now actively seeks foreign investment, Harper is promising a clearer standard, a playbook for foreign takeovers of Canadian companies, one he says will include reciprocity and a level playing field. But it isn’t at all sure that China likes the idea, especially when one of its many government-owned enterprises is the takeover target. We’ll see.

Because of the size of the Cnooc deal, Harper said recently, “the government has to put in place a pretty clear policy framework that indicates why it would or would not accept this decision or subsequent decisions.”

In other words, just saying a deal has — or hasn’t — a “net benefit” to Canada won’t cut it anymore.

Harper, however, didn’t say if Ottawa would approve sales of Canadian companies that are major players in their industry — like, say, Suncor
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So, is China truly willing to reciprocate? The bank deal might be one predictor.

The World Economic Forum has rated Canada’s financial system as the world’s soundest for five straight years. But, says a report by the Canadian Chamber of Commerce, even Canada’s banks and insurers have had difficulty with Chinese ownership limits and slow regulatory approvals for foreign financial institutions.

Harper has been sending clear signals that Canada wants to sell lots of Alberta crude to Asia — proof is in the ongoing fights over three proposed major pipelines from Alberta. And the rejection of the deal for big energy company Nexen would not be received warmly by China, analysts say.

“Either Canada is open for business or it’s not,” says former Nexen CEO Charlie Fischer, who’s now on the board of besieged big pipeline company Enbridge. (Enbridge’s proposed Northern Gateway pipeline from Alberta to B.C.’s coast is under heavy political attack.)

Fischer says, “If we turn down all of these transactions, then it seems to me that across the board, Canadian equities will lose value because we’re taking away a significant opportunity for investors to realize gains.”

According to Statistics Canada, China had made C$10.9 billion in direct investments in Canada at the end of 2011, while Canadian direct investment into China was C$8.3 billion.

That imbalance could be history — and great news for Canadian construction companies — following China’s just-announced stimulus program, which it isn’t calling a stimulus program. The money will be used to build infrastructure like highways and airports.

State-owned companies like Cnooc face one additional test under the current Investment Canada Act — that they will behave as a commercial entity and not as a policy arm of a foreign government. That also needs to be clarified by Harper later this fall.

Canada’s Industry Minister Christian Paradis said again last week that the Canadian government is looking for reciprocity in takeover deals, but that may be easier said than done. Right now, it appears that China is playing hardball, and it’s uneasy about overseas companies running operations in China. Time will tell if these business-culture differences will be worked out.

Harper’s government has 45 days to approve or veto the Cnooc deal, but can extend that 30 days. So, it appears likely that a decision on the big oil deal will come by November, along with Harper’s clearer foreign-investment guidelines. .

Whether the aforementioned bank deal is finally approved on the Chinese side is anybody’s guess. Harper brought it up when he visited Beijing last February, again last week, and it’s still stuck in takeover limbo. It’s seen as a litmus test of China’s future actions on takeovers on its own soil.

Harper admits that takeovers of Canadian companies by Chinese state-owned enterprises aren't popular with Canadians. A recent poll showed only 16 % of Canadians favored such deals.

Reciprocity is a word heard a lot in Canada these days in regards to Chinese-Canadian investment.

Canada has to improve its game and start accessing more foreign markets, says former Finance Minister Jim Prentice, who said in a recent speech, “It’s hard to imagine a full strategic partnership with China which did not welcome Chinese investment in Canada and similarly welcome Canadian investment in China.”

A good analogy here might be that Canada and China have just started dating. It’s an awkward period, one flush with transition considerations, and give-and-take.

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